Apple Card grew balance by $1 billion in 3 months, up 50% from June 2020

Apple Card’s balance grew by $1 billion (50%) in 3 months

Back in July, Goldman Sachs, the issuing bank for Apple Card, reported this in its Q2 earnings call:

Funded consumer loan balances remained stable at roughly $7 billion, of which approximately $5 billion were from Marcus loans and $2 billion from Apple Card

Source: Seeking Alpha

Three months later, the bank said this on its Q3 earnings call this month:

Funded consumer loan balances remained stable at $7 billion, of which approximately $4 billion were from Marcus loans and $3 billion from Apple Card.

Source: Seeking Alpha

My best guess is that the figures for Q2 and Q3 were likely as of the end of June and September. In the banking world, we call them month-end balance. Both Goldman Sachs and Apple have been very tight-lipped about Apple Card. There is very little information and data publicly revealed by either party. With that being said, I do think that it’s positive for Apple and Goldman Sachs to increase month-end balance in 3 months’ time.

There are two ways that this could possibly happen. 1/ The existing accounts in the portfolio saw more usage and a higher accrue of balance and 2/ the portfolio expanded with new accounts and its balance increased. Because we are still struggling in a once-in-a-lifetime pandemic, scenario #1 seems less likely to me. Even if the portfolio’s size stayed the same in September as it did in June, the increase in balance would be much lower than 50% as we see here. Hence, it’s my belief that Apple Card portfolio has expanded and as a result, so has the balance. It’s worth pointing out that since the number of accounts likely increased yet there is no official reporting on it, we don’t really know if the average balance per account really went up from June to September. Nonetheless, a higher balance means:

  • More accounts were opened
  • Accounts were used more, leading to an increase of balance
  • Customers are more likely to revolve, resulting in interest income for Goldman Sachs

Last year, Apple announced a payment plan for iPhones with 0% interest for 24 months. In June 2020, the payment plan expanded to include other product lines:

It’s not a stretch to see that these financing options contribute to the increase in balance of Apple Card portfolio. From Goldman Sachs and Apple’s perspective, they would prefer cardholders to make purchases outside Apple, but because there is little information officially revealed, there is no way to dissect how the portfolio is really performing.

At $3 billion in balance as of September 2020, Apple Card portfolio has so much room to grow. Based on outstanding balance, it’s quite small, compared to other issuers, though it’s unclear whether these portfolios are strictly in the US only

  • Chase: $122 billion in balance for consumer credit card as of Q3 2020.
  • Capital One: $12 billion in balance for consumer credit card as of Q2 2020.
  • Discover: $70 billion in balance for consumer credit card as of Q2 2020
  • Wells Fargo: $36 billion in balance for consumer credit card as of Q3 2020

A persistent and lucrative clientele for Goldman Sachs

I wrote a bit about the partnership between Apple and Goldman Sachs on Apple Card here before. Now I want to add a couple of more points to the conversation.

Apple users are enduring and lucrative. Once a person becomes an Apple user, he or she likely stays in the ecosystem and buys more products and services, as proven by Apple’s financials and analyst estimates. As of Q3 2020, Apple’s Wearables made up 11% of Apple’s total revenue and was the fastest growing segment in FY2020. Apple reported over 550 million subscriptions, up by 130 million from a year ago. With the introduction of Apple One and Apple Fitness+, that figure will likely go up even higher in the near future. Once an iPhone-reliant company, Apple now finds a robust source of revenue from Services, which was responsible for 22% of the company’s top line in Q3 FY2020.

Moreover, Neil Cybart, a prominent Apple analyst and the owner of Above Avalon, reported that nearly half of Apple users owned only one device: iPhone. He also estimated that only 35% of iPhone users in the US wear an Apple Watch. These estimates indicate that more Apple users will buy addition products on top of their iPhones and become engaged at a higher level in the ecosystem.

There is no credit card that offers 3% cash back AND interest-free financing options for Apple products and services like Apple Card. Hence, Goldman Sachs has a unique access to a lucrative clientele that

  • Tends to be sticky and loyal to Apple
  • Buys new expensive Apple products regularly on a few-year basis
  • Uses their Apple Cards monthly with their service subscriptions. Working in the credit card world, I can tell you that having users engaged and actively use cards every month is one of the major concerns for issuers. With Apple subscriptions and an expanding base, albeit as small as $3 per month for iCloud, Goldman Sachs likely will get a good number of active accounts with consistent spending every month, without any acquisition expenses.

Future opportunities

At first, there were only exclusive deals with 3% cash back from Uber, Uber Eats, Walgreen, Duane Reader and T-Mobile. Since then, Apple Card has welcomed to the fold Nike in November 2019, Exxon Mobil in June 2020 and Panera in August 2020. Additionally, Apple began to have acquisition bonus campaigns for Apple Card this year. A few months ago, there was a $50 bonus for every new Apple Card user with a minimum $50 purchase at Walgreen. Just a few days ago, it was reported that there is now a $75 bonus for new Apple Card users with a qualifying purchase at Nike. The more exclusive deals like these are, the more likely consumers will use Apple Card outside of Apple. And there is no reason to believe that they won’t add new partners or have acquisition campaigns in the future.

Besides Apple Card, Apple has been consistently and regularly promoting the use of Apple Pay with ad-hoc deals such as 15% off with American Eagle in October 2020, 50% off with Snapfish in July 2020 or 30% off with Rayban in May 2020. There is no data on how many Apple Pay accounts are paired with Apple Cards. But given the fact that users can only earn 2% Apple Cash from every Apple Pay transaction by using Apple Card, I won’t surprise me that Apple Pay promotions indirectly benefit Apple Card and Goldman Sachs.

There are rumors of new Apple products in the works such as Air Tags, Airpods Studio or Apple AR glasses. The more products and resulting services there are, the better the future outlook will be for Apple Card.

Disclosure: I own Apple stocks in my personal portfolio.

Section 230 – The Failure of Facebook and Twitter

You must have heard lawmakers rage about Section 230 and their threats to revoke the protection for Internet companies unless the companies stop alleged biases against their respective bases. Today, I want to share some of my thoughts on the law, what has happened around it and what I consider a failure by Internet companies, specifically Facebook and Twitter, to live up to their responsibilities. Frankly, it’s a highly complicated matter and I am no lawyer, but I just lay out what I read and thought for myself. Have a read, but form your own opinions . First off, have a look at what Section 230 text actually says. Here is the piece that matters the most:

(1)Treatment of publisher or speaker

No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

(2)Civil liabilityNo provider or user of an interactive computer service shall be held liable on account of—

(A)any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected; or

(B)any action taken to enable or make available to information content providers or others the technical means to restrict access to material described in paragraph (1)

The term “information content provider” means any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service.

Source: Cornell

From a service provider perspective, what I understand from the text is that companies such as Facebook or Twitter cannot be held liable for user-generated content on their platforms, unless it is the companies themselves that create the content in question. It is also very important that the text of Section 230 exempts service providers from liabilities for content moderation efforts, whether it’s the technical means to content (user accounts) or censoring/take-down of the content itself.

This protection given to service providers is particularly helpful in growing the Internet. From a personal point of view, I have benefited greatly from content sharing by a 3rd party. I have learned a lot from things shared on Twitter by folks other than the content originators themselves and I believe others do too. Were Internet users made reluctant to share content because of the removal of Section 230, the Net wouldn’t be as great as it is right now. From a company perspective, Section 230’s protection enables the building of platforms without investing heavily in content moderation to avoid possible litigation that would happen due to frivolous lawsuits. Imagine that you are an aspiring entrepreneur that wants to build a small forum dedicated to basketball by yourself and with your modest saving, yet has to shoulder legal expenses because some guys sue you for not taking down offensive comments.

While content sharing has its own benefits, it does also have downsides as we now allow the worst, the dishonest and the ones with a harmful agenda to inflict harms on others. In this case, it falls onto service providers to moderate content. Having millions, if not billions, of users, Twitter and Facebook are prime destinations for actors that want to disseminate false and harmful information. Bafflingly, even though the law specifically shields them from legal liabilities for content moderation and they have the resources to conduct the moderation, Facebook and Twitter still fail to do their duties. For instance, when Trump posted false, dangerous and disparaging information on Twitter, the social network labeled his posts, but still kept them on site because according to Twitter, it’s in the public interest to do so. If the point was to let the public know that the President of the United States lied, distributed propaganda and conducted online harassment, it would be sufficient to simply say so and take down the harmful content. Twitter didn’t remove mostly what Trump said because they were afraid of the wrath from Republicans and they didn’t want to lose a significant portion of the user base.

In many cases, Facebook didn’t live up to their duties for keeping their platform safe for users, either. But in the case of Facebook, the reason remains to be seen, whether it’s financially motivated or Mark Zuckerberg is concerned about the political blowback or he actually prioritizes what he considers “free speech”.

While Section 230 isn’t perfect and leaves much to be desired, calling for a revoke of the law, in my mind, inflicts damages to free speech and 1st Amendment. What it needs is an upgrade and revisions designed to solve the shortcomings of Section 230. Sadly, what has transpired is nothing but. Trump signed an executive order that essentially would strip Twitter of Section 230 protection because it labeled his Tweets as harmful and hid them. Senator Hawley introduced a legislation that would require big tech companies to be content neutral, a definition that would be determined by a panel of five FTC commissioners. If a company is deemed to have politically biased content by two commissioners, it will lose Section 230 protection. The problem is that FTC commissioners can be political appointees and as a consequence, there is no guarantee their assessments are not biased. The legislation would create disastrous downstream effects.

Danielle Citron, a law professor at the University of Maryland, proposed a seemingly vague revision to Section 230, which states that “immunity is only available to platforms that take “reasonable steps to prevent or address unlawful uses of its services.”” The specific definition of reasonable will be left up to the courts. While such a suggestion has its upside, the problem again is that the judicial system in the US has been increasingly politicized. As of this writing, there is a huge battle with regard to the appointment of a Supreme Court and a discussion over court packing. Politically appointed judges can’t guarantee fair rulings any more.

In defense of big tech companies like Facebook or Twitter, moderating content for millions of users with different philosophies in complicated matters is no easy feat. It’s labor intensive and expensive, and even with immense investments, it’s highly challenging to cover endless scenarios that can happen in real life. Moreover, political pressure is also a legitimate threat to their business. With that being said, I still stand by my criticisms because:

  • These companies are still benefiting from Section 230 protection, yet they fail their responsibilities to moderate content sufficiently.
  • They have enough financial resources to invest more in content moderation or lobbying for a more fair Congress

With great power come great responsibilities. Facebook and Twitter have millions, if not billions of users. They wield enormous power, yet they are failing us in their responsibilities. I wish they fought in this issue as hard as they did in the issue of immigration.

Apple’s investment in the App Store and its value

Many folks criticize Apple for taking commissions on the sale of digital content on iOS devices, saying that the company doesn’t do anything in the sale process to deserve the commission. I disagree. I outlined my thoughts on the criticisms of the App Store. In the latest filing as part of its legal battle against Epic Games, Apple provided some data points on what they spent on the App Store and the impact. Because these excerpts come from a legal document submitted to a court, it’s unlikely that Apple made them up. Have a read and decide for yourself if it’s reasonable to ask a company not to benefit from the servers it renders and investments it makes. Also, would you do the same if you were Tim Cook running the company?

Investment in data centers and staff maintaining the App Store

Apple has spent billions of dollars to develop and maintain the App Store. The data centers alone that Apple has established to facilitate the App Store have cost Apple many billions of dollars, and Apple spends hundreds of millions of dollars per year to employ the engineers who contribute to the App Store’s success.

Services that Apple provides under the License Agreement include handling more than 25 million customer support cases a year with a dedicated team of over 5,000 full-time AppleCare advisors; verification of customer accounts to maintain the integrity of the marketplace, including removal of hundreds of millions of fraudulent customer accounts each year; and implementing other measures to combat fraud and refund abuse.

Apple contracts with third-party payment settlement providers to facilitate Apple’s own ability to accept customer payments. During this process, transactions are verified and payments authorized, but this function is just one part of the process and is outsourced to third parties to whom Apple itself pays a fee. 

Source: Apple’s filing

The App Store removes administrative hurdles for developers such as cross-country taxes

While expanding developers’ ability to monetize their apps, IAP also removes administrative burdens and allows developers to effortlessly sell their services to, and receive payments from, customers in the 175 countries where the App Store operates. This support includes collecting and managing payment information from around one billion potential customers around the globe; handling conversions to 45 currencies; and ensuring compliance with local tax laws, and handling tax withholding in scores of countries. Moreover, the records maintained through IAP help Apple provide both routine and customized business analytics to app developers. For many developers, it would be prohibitively complex and costly to carry out these tasks on a similar scale. Yet Apple’s infrastructure makes it effortless for them. 

Source: Apple’s filing

The App Store shields consumers from potentially harmful apps

Since January 1, 2020, Apple has processed more than four million app submissions, approving approximately two thirds of them and rejecting approximately one third for noncompliance with the Guidelines and/or the agreements. For example, more than 100,000 app submissions are rejected each year for data collection and storage practices that run afoul of Apple’s strict requirements for consumer privacy protection. Most of these developers whose apps are rejected make changes to their apps to address Apple’s concerns, and ultimately have their apps published to the App Store.

Source: Apple’s filing

Since 2017, Apple has terminated:

more than 75,000 accounts of developers for introducing new features to their apps without going through App Review, i.e., bait-and-switch conduct, in which a developer makes changes post-review to circumvent the app review process, also referred to as Illicit Concept Changes (ICC);

more than 2,000 developer accounts for introduction of a non-IAP payment method for in-app sales of digital content; 

more than 60,000 developer accounts for inclusion of hidden features or obfuscated code or for facilitating the download or installation of executable code; and

more than 175,000 developer accounts for other fraudulent conduct.

Source: Apple’s filing

Disclaimer: I own Apple stocks in my portfolio

Brief thoughts on Apple One & Apple Fitness+

Yesterday, Apple held an event to announce updates on their hardware, software and services. Everything related to Apple should be widely covered. You can read about the event on the news. I just want to share my thoughts on the two notable services: Apple One and Apple Fitness+

Apple Fitness+

It’s a fitness subscription that resides inside the Fitness app and is built for Apple Watch. Essentially, if you’re wearing an Apple Watch and have a screen that can show various workouts developed by Apple, you can see health and exercise data while sweating and hustling through the physical torture :D. According to Apple, there are workouts for everyone, including Cycling, Treadmill, Rowing, HIIT, Strength, Yoga, Dance, Core, and Mindful Cooldown. Each workout is accompanied by curated music, but you can also add your own tunes from Apple Music. Apple claimed that machine learning on device would use your previous workouts as well as health data to personalize suggestions for you. All the data would not leave your devices.

Apple Fitness+ home screen on iPhone 11 Pro.
Figure 1 – Apple Fitness+. Source: Apple
Figure 2 – Apple Fitness+. Source: Apple

Apple Fitness+ will be available at the end of the year in the US, Australia, Ireland, the U, Canada and New Zealand. A subscription will cost $9.99/month or $79.99/year with one month trial and can be shared with up to five people. To gain access to Apple Fitness+, customers need Apple Watch Series 3 or later.

Now, I have seen a lot of comparison with Peloton since the service was announced. Let’s take a look at whom each should be for

Whom it is for
Apple Fitness+ 1/ Those who own an Apple Watch Series 3 or later
2/ Those who don’t want to spend at least $1,400 for a piece of equipment and a subscription on top of that just for workout
3/ Those who don’t have a lot of interior space for a bike or a tread
4/ Those who travel quite a lot and can’t carry equipment
5/ Those who prefer working out without equipment
6/ Those who want to incorporate health data always on Apple devices with workouts
Peloton1/ Those who don’t own an Apple Watch Series 3 or later (Obviously!)
2/ Those who are serious enough about fitness to make a sizable investment in a Peloton bike/tread
3/ Families whose multiple members want to share the same account and bike/tread
4/ Those who have enough space for a bike/tread
5/ Those who stay home often enough

For those who already owned a Peloton machine and subscription, I don’t imagine they will sign up for Apple Fitness+. The sunk cost of a Peloton bike/tread is so high that consumers will try to milk as much out of it as possible. Hence, Peloton shouldn’t have to worry about that. While Apple has many fans, it also has as many, if not more, critics. As Apple Fitness requires an Apple Watch, Peloton shouldn’t worry much about this segment of the market, either. It’s inconceivable to think a non-Apple person would invest in a Watch and iPhone (who has the former without the latter?) just for this fitness subscription.

What should worry Peloton is potential customers who own Apple devices and don’t have a Peloton subscription. To those who are interested in fitness enough to spend $10/month, but not as much to spend $1,400+ for a bike, Apple Fitness+ should be much more appealing as the barriers to entry are much lower. Sure enough, a $350 Apple Watch is still a significant investment, but if historical product rollouts by Apple are nothing but an indication, they will add more health-related functions to their Watches to make them more attractive. Case in point. The new Apple Watch will be able to monitor oxygen level in blood. Hence, compared to a big and expensive bike from Peloton, a combination of a Watch and Fitness+ should be an enticing alternative.

With that being said, I do think the market is big enough for these two players. The hardware requirement limits Apple in the same way as it does Peloton. But if a non-Apple phone or smart watch manufacturer jumps into the fitness market and offers the same service, it can spell trouble for Peloton because in that case, the manufacturer wouldn’t be limited by the hardware requirement any more.

Apple One

This is one of the badly kept secrets. On Tuesday, Apple announced its long anticipated umbrella subscription bundle called Apple One. Basically, an Apple One subscription offers consumers access to multiple Apple services such as iCloud, Apple Arcade, Apple Music, Apple TV+, Apple Fitness+ and Apple News+. Below are the tiers and prices

Figure 3: Apple One Tiers. Source: Apple

A bundle is to encourage consumers to use more individual services, usually at a discount. Apple One is no exception. If you buy services individually and add them all up together, Apple One offers a great value for money. Morgan Stanley had a great summary below

Image
Figure 4 – How much money is saved with Apple One. Source: Ben Bajarin

Premier offers an astounding 45% discount and if your family is already using most, if not all, of the included services, Premier tier is a no-brainer. Additionally, it’s worth pointing out that customers with Apple Card will get 3% cash back from Apple One, on top of the already incredible discount.

What gets me excited about a bundle like this is what lays ahead. If you think about it, I believe that Apple must have had this vision for a while. First they rolled out iCloud. Then Apple Music. Then Apple News+, Apple Arcade, Apple TV+ and Apple Fitness+. There is no way that Apple will stop here. I am confident that they already have something in the pipeline already. It won’t surprise me if they add more and more services to their flagship bundle and make it the Amazon Prime of Apple Services. A few options I can think of:

  • Apple Care?
  • A service related to books as they already have iBooks
  • Something related to cars as iPhone can replace car keys for the new BMW already

Apple is known for incremental yet effective progress over time, proven by its approach to hardware and software. So don’t be surprised that it is taking the same path here with Apple One

Disclaimer: I own Apple stocks in my portfolio.

My thoughts on Walmart Plus

On Tuesday, Walmart unveiled its a long anticipated membership program called Walmart+. For $99/year, members can have unlimited free qualified deliveries from stores, fuel discounts at Walmart & Murphy stations as well as shopping tools such as scan & go to avoid long lines. To qualify for free shipping, deliveries must be $35 or more. Walmart said that there were more than 160,000 items available for this program, ranging from groceries, toys, household essentials to technology. Additionally, members can get 5 cents per gallon off at Walmart and Murphy gas stations. The company said that customers would be able to subscribe for this program starting 15th September 2020 with a 15-day trial.

How competitive is it?

Compared to Amazon Prime, Walmart Plus is years behind. First of all, at $119 a year, Amazon Prime includes many more additional benefits such as exclusive discounts, unlimited deliveries of qualified items without minimum purchase requirement, media & entertainment perks, just to name a few. Among the biggest benefits that Prime offers is the ability to get unlimited two-day delivery for low value items. I can’t count how many times I order stuff less than $15 individually. Second, Amazon carries a lot more items for Amazon Prime than Walmart. Third, when it comes to online shopping, it is a much more established name than its Arkansas-based rival. Shoppers trust Amazon and that’s a true competitive advantage.

What works for Walmart Plus in comparison to Amazon Prime, I believe, is that it offers less expensive groceries. My experience with shopping groceries on Prime is frustrating. I was confused about groceries on Amazon itself and then Whole Foods. Plus, they are not as cheap as groceries sold by Walmart. Hence, if customers are geared more towards grocery shopping, I think Walmart Plus can make a play there.

Other grocers or retailers follow almost the same playbook. Deliveries have to meet a certain threshold to be free and if retailers don’t handle delivery themselves, they’ll partner with Instacart. In that case, customers either pay a small fee for each delivery or enroll in a membership with Instacart (in either case, you are expected to tip drivers). Each retailer will appeal to shoppers in a different way. Take Aldi for example. Its unique selling point is inexpensive fresh groceries. Look for cheap grapes and great Greek yogurt? Head to Aldi. The downside is that Aldi carries few SKUs and less flexibility for shoppers. Target offers much more flexibility and choice as it carries more items, but its groceries are significantly more expensive than those at Aldi or Walmart, in my experience. Costco seems to match Walmart on the grocery front. A Costco member (at least $60/year) can have free grocery delivery for orders of $35+. Groceries at Costco are competitive in prices, compared to those sold at Walmart. Other items can have free delivery too, and with no minimum order requirement, but it will take at least two days.

Figure 1 – Delivery options at Costco. Source: Costco

There are other important players in this space such as Instacart and Shipt. Instacart Express or Ship membership is almost identical to Walmart Plus. Both cap membership fees at $99/year and a qualified basket has to be $35 or more. Unlike Walmart, Instacart is more focused, almost exclusively, on grocery delivery. Shipt is similar to Instacart and owned by Target, but also delivers for other brands as well. An advantage that Shipt or Instacart has is their network of partners. Walmart Plus works only for items sold by Walmart. With Shipt or Instacart; however, shoppers can order from different stores that sell different private brands. It offers shoppers more choices and flexibility. This is the list of retailers partnering with Instacart at where I live. I am sure in bigger cities, the list will be much longer

Figure 2 – Retailers that partner with Instacart in Omaha. Source: Instacart

It’s worth pointing out that even though you can order from multiple stores within Instacart, each store has its own check-out and minimum purchase requirement. The value for customers here is that they won’t have to create an account or download multiple apps on their phone. Within Instacart, they can place orders from different apps. What works for Walmart against the likes of Instacart is that Walmart offers non-grocery items for deliveries as well. Walmart Plus also offers fuel discounts, something that isn’t possible with Instacart.

This is how I think about the positioning of a few retailers who either have their own delivery programs such as Walmart or Amazon, or have their delivery powered by Instacart/Shipt

Figure 3 – 2×2 positioning metric

Among the ones I picked to analyze, Costco is the most similar to Walmart in terms of positioning. Their assortments and offering of inexpensive groceries are pretty similar. While Costco membership, the lowest level at $60/year, is cheaper than Walmart Plus, the fuel discounts and in-store shopping tools from Walmart make the comparison interesting. As far as I am concerned, Murphy and Costco stations are pretty similar in gas prices. Throwing in another 5 cent discount can be attractive to shoppers who drive a lot. Plus, in-store shopping perks like Scan & Go and pay with Walmart Pay can offer extra flexibility. Sometimes, we just need one or two quick items that wouldn’t qualify for a free shipping and we don’t mind stopping at a store for a few minutes. These shopping perks can make life a little bit easier for shoppers to get in and out of a store quickly.

What’s next?

It’s both interesting and challenging to look at this space as there are so many ways to slice and dice. For instance, Walmart Plus enables Walmart to keep their faithful customers from joining the likes of Instacart. If somebody tends to shop more at Walmart for groceries, they now have more reasons to stick to the brand. If some people usually shop at Costco, both Costco and Walmart have its appeal and the decision will rest with each shopper. For those who like to shop non-grocery items a lot and prefer the convenience, I don’t think Walmart Plus stands a chance against Prime yet. If some shoppers prefer the flexibility of ordering from multiple stores within one app, Instacart is the way to go.

Walmart Plus has tailwinds behind it. First, various stores across the country will power their delivery and be a huge competitive advantage. Few retailers can rival Walmart in this sense. Second, the ongoing pandemic and the explosion of grocery eCommerce are significant positive trends for Walmart. Moving forward, Walmart will likely continue to add more benefits to its membership program. The most obvious play is to expand the selection, pushing Walmart’s position in Figure 3 to the right. The more items are available for delivery, the more attractive Walmart Plus will be. Another idea is to mirror what Amazon did with Prime by throwing in other perks such as books, music, movies, etc…I suspect Walmart won’t increase Walmart Plus membership fees in the next two years at least. It took Amazon almost ten years to increase Prime’s fees from $79 to $99/year and another four years to $119.

The future isn’t without challenges for Walmart Plus. There is really subscription fatigue among consumers. How many consumers are willing to spend money on entertainment subscriptions (Netflix, Spotify, Disney Plus…), Amazon Prime or Instacart or Costco membership and then Walmart Plus. The economic uncertainty may be a factor as well. Folks may try to tighten their budget more and not have enough disposable income for another subscription. Plus, as Walmart moves to make its membership program more attractive, others don’t stand still. Instacart will continuously expand its partnership network. Amazon will definitely work to move more into grocery delivery.

I found a gem: InPractise

Today, I ran into a very awesome website called InPractise. InPractise is a treasure trove for nerds or curious minds like myself. It interviews folks, mostly former & current executives at major firms with tribal and insider knowledge as well as domain expertise, to shed light on great business insights, practices and strategies. The content is delivered in audio and text format, which I appreciate greatly as while I sometimes like to listen to interviews, taking my eyes away from the screen, I mostly consume content better by reading. For $20/month on a monthly basis or $200/year, subscribers gain access to 10+ interviews per month. If you do the maths, it comes down to $2 per interview, which is quite cheap for valuable insights. Another cool thing about InPractise is that they let you try it out for two weeks first for free without asking your credit card details.

I gave it a try today and have been spending hours reading the previous posts. I am talking about it here as a token of my appreciation to the website for letting me read their stuff for free for two weeks, even though I have every intention of becoming a subscriber already. Below are a few insights that I found very helpful

Aldi: Hard Discounter Business Model – With Former CEO of Aldi UK

Finally, as a hope, I would say, a discounter like Aldi when entering a market would prefer that its competition is stock market listed. Stock market listed companies have programs, management incentive schemes, which means that the management is not likely to react to a new threat until the last minute. They’re whole compensation package, what is expected of them as a management team, their contracts, their job descriptions are all based on maximizing shareholder value, maximizing profits.

Source: InPractise

Basically, we did everything out of those first 15 years to get ourselves what our goal was. Which is to match the quality level of the best-selling brands on the market. Now, some of that was easy. We could do it within four or five years. Some of it was dreadfully hard. You try making a KitKat even in a normal chocolate factory, which rivals a KitKat. It is really difficult to do. Either the chocolate mushes into the biscuit, or the biscuit is too hard and breaks your teeth. So on. It was really a journey to end up with a thousand products, which truly were rivals for the best-selling brands on the market under the private labels which the company was doing. Enormous fun. I never had a corporate lunch in 25 years because every midday, I was involved in testing product to see whether or not you could tell the difference between the Aldi version of Cornflakes and Kellogg’s. Or the Aldi version of Ketchup up and Heinz. Eventually, we got there. It was truly very difficult to tell the difference. That’s when you’ve got a business concept, which the majority of consumers will not turn their noses up at.

Source: InPractise

Scale means purchasing power with an individual supplier. You can’t have hundreds of suppliers all making one product and just selling it in different places. You actually have very few to start with one, maybe two or three in the future who are producing enormous scale. If you lost one of those, it’s an absolute catastrophe. First of all, it won’t be possible for the other suppliers, even if you have a dual supply, to make up another 50 percent overnight. Secondly, you run the risk that the quality is not the same. 

Thirdly, you have the situation where your reputation is put at risk with companies that would have to make serious investment decisions to be able to make your private label to the same quality as brands. We were always incredibly protective over the suppliers. Quite actually forgiving when mistakes were made, so long as they weren’t made on a constant basis. Tried to be more than fair with that supply base. What does more than fair mean? To be people who agreed things on handshakes and don’t need 50-page contracts to endorse it. Secondly, to pay on time. The biggest single question every supplier will have about its retail partner is: Am I going to get the money for the product that I’ve put all the investment into and delivered to their warehouse 15/20/25/30 days, whatever the contract actually says, later. I will tell you, you’d have got fired in Aldi if you paid one day late. A CEO would get fired if he deliberately paid one day late a supplier.

Source: InPractise

After only a few years, most Aldi management can tell you exactly how long it will take to clean a store in minutes. How long it will take to merchandise a pallet. How long it will take to unload a truck. How long it will take to process a hundred customers through the cash registers. There are prizes given for people who can invent a small change to the business process that can quicken something up even if it’s only a few seconds because that few seconds is multiplied by thousands of stores and hundreds of days per year.

The final bill for this super, little idea is often worth an astronomic amount of money in terms of cost reduction. That’s the philosophy for which the business is built on. A nice little example. If you pick up a product, I don’t have one in front of me, but if you pick up a product and you show it to a normal food retailer, he will look at the colors. He will look at the messages that the product has on it. He will look at how beautiful this item is. He’s thinking how many of those I can sell. I’ll tell you, you put this product in front of any Aldi operating manager and the first thing he’ll look at is, how big is the barcode? If that doesn’t scan with one sweep of the arm across the cash register, that’s going to cost me money. That’s just one of a thousand examples I could give you of how this cost mentality is built in from day one.

Source: InPractise

Netflix Business Model & Economics – With Former Director of Financial Planning and Analysis at Netflix

I’ll take the other side of it. I don’t think they want to move into it, nor do they need to for growth. I think to further saturate the US, they would probably move into news and sports more aggressively. They are growing just fine in the US and are growing even better internationally, so I don’t think they have to. I think they would do that as a distraction tax for a few reasons. If they were to move into news and sports, live is largely supported by advertising. Advertisers pay a premium and people don’t skip the commercials as much. Do they want to go out and build an ads sales force of hundreds and thousands of employees, insertion of dynamic ads, data which Facebook and Google have been collecting for years to do this at scale? It is beyond their focus right now, especially when they have this massive opportunity to take what they’ve already done and port that over to new countries with different content. They’re dabbling with news and sports and reality and other categories and they’ll push those. But you’ll see non-scripted, the reality competition shows they’re doing, before news and sports. Sports is extremely challenged and maybe that will shake out over the next three years, but I don’t see it as a near term focus.

On the question of whether Netflix should move into sports. Source: InPractise

The real question, if you look at more of a five-year view, is do they have pricing power domestically? I absolutely believe they do. They’re going to continue to accelerate their spend, the number of shows and categories such as unscripted theatrical movies they are investing in. I think that will, eventually, result in what Disney is now doing. Disney is experimenting with bringing a $30 super premium movie, like Mulan, which was supposed to go to theaters, and bringing it onto Disney Plus and expecting consumers to pay a regular subscription fee, plus $30 on top. Netflix would take that same movie, that is maybe on a par with Mulan or The Irishman, and give it to users for free.

Eventually, they are going to say, you are getting these movies at Disney – who are charging you $20 to $30 – so we are going to increase our price from $13 to $15. They are still not the price leader, as they are behind HBO Max which is $15. Netflix has a $15 price but its average user is not there, as they are on a lower tier. They have a chance to move people up those price tiers, but I don’t foresee that happening in the near term. They have that option when they choose to exercise it and I expect them to exercise it very diligently and thoughtfully.

Source: InPractise

Lidl in Ireland: from 0 to 12% market share in 20 years – With Former Head of Sales Organisation, Lidl Ireland

It is very difficult to give a percentage on that because it is a changing product group. Some items are discontinued and some are coming in, so every day or every week that changes, but probably around 10% to 15% as a rough guide. When you look at the shelf. you have your top shelf, middle shelf and bottom shelf. Sometimes there are four or five shelves, but the own brand will always be at eye level, first in flow. The brand will be on a shelf but always hidden. It might even be on the floor. I remember Nescafe coffee never ever made it off ankle height, but there’s a reason for that, that was always to promote the own brand and give it the best possible chance.

Source: InPractise

My thoughts on criticisms of the App Store

Should Apple benefit from the App Store?

If you invest in a restaurant, you are entitled to its benefits and profits. If you write a software from scratch, you’re entitled to the economic benefits from it. That’s how business works. A party puts time and money at risk for a shot at success. It is the case for many and should be the case here for Apple. Apple introduced the App Store in 2008 and over the years, it has invested a lot in growing and maintaining the App Store. On principle, it should be treated equally as other businesses. Some argue that Apple should not charge commission fees on its platform. Well, Apple is responsible for the store and it should be able to benefit from it the way it sees fit. If you run a restaurant and somebody comes in and asks you to not charge for food or drinks, what will you think? Insane, right?

Is 30% too high a commission?

Apple levies a 30% commission on digital goods bought through its in-app purchase. For subscriptions, the commission is 30% in the first year and drops to 15% in the second year onwards. Many have lamented that the fee is too high and it puts an enormous financial strain on developers, especially those that are already operating on a low margin. Well, there is no free lunch in the business world. Developers have access to a lucrative user base with more than 500 million paid subscribers and a billion active devices. By being on the App Store, apps can be found through the search function, as well as accessible in every corner of the world. Users can download the app in a matter of seconds with the level of trust that can be hardly found anywhere. Is it right to argue that developers should get all of those for free without having to pay? I don’t agree with that.

Some said that Apple should NOT get any compensation on a regular basis because it doesn’t contribute to the development of apps. But developers don’t pay Apple to receive development input. They pay Apple for the app distribution. No matter how good your product is, if you can’t figure out distribution and get it to the hands of customers, what worth will it be? People pay Facebook or Google for access to a select group of users. Folks pay to attend high-end conferences to mingle with executives and potential clients. Donors pay to participate in fundraising dinners to talk to lawmakers so that they can have more influence. I don’t see the problem with Apple charging developers for this limited yet important commodity: access to customers who trust Apple and are willing to pay for apps on Apple devices.

When I was researching on Wix, I came across this from its annual report:

The App Market consists of web applications that are developed by us or by third-party developers. All third-party applications undergo a limited evaluation which is focused mainly on technical functionality, and partner agreements are signed prior to publication in the App Market. We are customarily entitled to a share in 30% of net revenues from the sale of every third-party application purchased through our App Market. We are responsible for the development, operation and maintenance of applications that we create, and the third-party developers are responsible for the applications that they create. However, we may remove a third-party application at any time if it does not meet our standards or for other reasons.

Source: Wix

A short while ago, Apple commissioned an independent study on marketplaces’ take rate. When you look at what other platforms charge, the rate at which Apple sets its commission doesn’t look as outrageous as others make it out to be

Source: Analysis Group
Source: Analysis Group

Apparently, what Apple is doing is similar to the industry standards. I don’t see there is anything inherently wrong with the commission approach. As to the question of how high the commission should be, I’ll argue that it will never be low enough for developers unless it goes down to zero. Some long-time industry observers noted that developers used to pay for a much higher share of their revenue to have apps distributed in the past, before the App Store was debuted. They cheered when the App Store was introduced and the commission was 30%. Now, they are complaining that 30% is too high. I suspect that 15% will please developers more in the next two years and they will complain again after that.

Should Apple stop requiring the use of in-app purchase?

If your apps don’t generate revenue on Apple devices, you don’t have to pay Apple for anything. In fact, a study commissioned by Apple estimated that 85% of billings on the App Store in 2019 belonged solely to developers. If an app sells digital content and goods that are consumed on Apple iOS, Apple charges a commission. There are a few cases in which apps can avoid in-app purchase

3.1.3(a) “Reader” Apps: Apps may allow a user to access previously purchased content or content subscriptions (specifically: magazines, newspapers, books, audio, music, video, access to professional databases, VoIP, cloud storage, and approved services such as classroom management apps), provided that you agree not to directly or indirectly target iOS users to use a purchasing method other than in-app purchase, and your general communications about other purchasing methods are not designed to discourage use of in-app purchase.

3.1.3(b) Multiplatform Services: Apps that operate across multiple platforms may allow users to access content, subscriptions, or features they have acquired in your app on other platforms or your web site, including consumable items in multiplatform games, provided those items are also available as in-app purchases within the app. You must not directly or indirectly target iOS users to use a purchasing method other than in-app purchase, and your general communications about other purchasing methods must not discourage use of in-app purchase.

3.1.5(a) Goods and Services Outside of the App: If your app enables people to purchase goods or services that will be consumed outside of the app, you must use purchase methods other than in-app purchase to collect those payments, such as Apple Pay or traditional credit card entry.

Source: Apple

What these exceptions essentially say is this:

  • If a customer already has a subscription purchased before, the customer can continue to use that subscription and the app doesn’t have to pay Apple. For instance, if you install Netflix or Bloomberg app AFTER purchasing a subscription on a browser, neither Netflix or Bloomberg has to pay Apple
  • If an app acquires new users on an Apple device with its payment mechanism, it is obligated to offer in-app purchase as well and it must not use language that blatantly discourages the use of in-app purchase
  • If you book an Uber, but the transaction takes place in a car, not on an Apple device, Uber can avoid using in-app purchase. The same case applies for AirBnb rentals. If you book a room on AirBnb iOS app, but stay in a physical room, AirBnb doesn’t have to pay Apple. However, if AirBnb offers AirBnb Experiences on iOS, asks users to pay and then offers content on iOS, then it will have to pay Apple

I do think these exceptions make sense. If the consumption of goods or services takes place outside an iOS device, Apple shouldn’t benefit from that. In return for giving such apps access to users, Apple benefits from the presence of the apps that make the ecosystem and their devices more useful. Imagine how much you would like your iPhone less if it didn’t have Uber, AirBnb, Booking.com apps, just to name a few.

If Apple didn’t mandate the use of in-app purchase, how many apps would voluntarily use it? My guess is: not many. Hence, every time a user opens an app on their iPhone, they would have to go to a browser to pay for services. That wouldn’t be a nice user experience.

If Apple didn’t forbid the discouragement of in-app purchase, I imagine apps would play every trick in the book to favor their own payment mechanism. Take Turbo Tax below as an example of tricks that apps could use. In that case, Apple would be affected financially. Therefore, I can see the reasoning behind its requirement of not discouraging the use of in-app purchase. If you don’t look out for yourself, who will?

Source: ProPublica

A curated store or an open system?

Many argue that Apple should open up its walled garden like Android. The problem is that while Apple is known for security and privacy, the same can’t be said about Android, which is prone to malware. A study estimated that Android devices are 50 times more malware-affected than iOS ones. Plus, Apple is known for protecting user privacy. It went to court against the US government for that. Many users, including yours truly, appreciate it greatly.

It’s worth pointing out that Apple wasn’t the first to introduce a locked-down system that didn’t degrade. Nintendo, Sony, and Microsoft consoles restricted the software that could be modified on their host operating systems and ran with limited capabilities. This resulted in fewer support calls, reduced frustration, and limited piracy.

One of Apple’s most touted virtues is that the company creates secure devices that respect user’s privacy. In fact, they have even gone to court against the US government over security. Yet iOS remains the most secure consumer operating system. This has been made possible through multiple layers of security that address different threats.

For now, let me just say that, as a parent, there are few things that would make me happier than more stringent App Store rules governing what applications can do. In the end, I value my iOS devices because I know that I can trust them with my information because security is paramount to Apple.

In the battle over the security and privacy of my phone, I am happy to pay a premium knowing that my information is safe and sound, and that it is not going to be sold to the highest bidder.

Source: Miguel de Icaza

Opening up a platform to allow total freedom for developers may not be as good as many think. Take Facebook as an example. It strives to give everyone’s freedom to say whatever they want. The consequences are that folks use First Amendment Right to spew out misinformation and hate speech. With regard to apps on Facebook, you don’t need to look further than what happened with Cambridge Analytica.

The problem with an open platform is that giving everyone unrestricted freedom is a preclude to getting the worst behavior from them. Precisely because of that, I much prefer a curated and controlled platform. Of course, that means Apple is very powerful as it can dictate which app is distributed and how. We should definitely strive to continuously hold Apple accountable, but requiring Apple to open its marketplace isn’t the solution.

Apple stifles innovation?

Since its debut, the App Store has facilitated the introduction of many apps. Without the App Store, we likely wouldn’t have Uber, Lyft or Robinhood, just to name a few. So far, it has been a boon to innovation in my opinion.

Some argue that Apple’s iron grip on the App Store limits future innovation. Well, that may sound logical on the surface, but I really doubt the sentiment. The reason is that it’s difficult to pinpoint exactly what sort of innovation is being stifled by Apple’s rules. There are only a handful of app marketplaces for phones. Even though they differ from one another to some extent, they should work essentailly the same way. If an app can appear on Google Play, which works similarly as the App Store, it shouldn’t have to alter its core too much to be featured on the App Store. If an app cannot work on any of the app marketplace, then it’s hardly Apple’s fault that such an “innovation” can’t be brought to life.

Innovation is very abstract and can be misused as a blanket reason like “national security”. The argument that Apple stifles innovation CAN be a valid one, but as of now, I see it more like a hypothetical scenario with no evidence to back it up.

Apple’s inconsistent enforcement of its rules

In my opinion, most of Apple’s fights with developers resulted from execution failure. The rules are there, but they applied the rules differently from one case to another. To Hey as an example, the app was rejected in the beginning because it didn’t offer in-app purchase. However, the issue was that Hey’s competitors did the exact same thing, but were approved by Apple to appear on iOS. As you can imagine, laws don’t mean much if they aren’t applied fairly and consistently. It’s the same for the App Store Guidelines. To make the Guidelines more respected and mean anything, Apple must be better in its application.

Some may argue that Apple has to handle thousands of updates and apps on a daily basis, so it’s understandable that some slipped through the cracks. I’d say that as a $2 trillion company that holds so much power over us, it should be better.

Solutions to the App Store issue

The App Store Guidelines haven’t changed much since they were written. While I tend to agree that they may need updating, I struggle to see exactly how they should be. One reason is that this is a very nuanced and complicated issue. Apple has to strike a sweet balance between its own interest and the interest of users as well as developers. Only Apple has enough information to make informed decisions.

Some, including Ben Thompson, argued that Apple should update its guidelines based on the marginal cost of apps. Specifically, apps that have marginal costs should be granted a lower commission (10%) than the standard 30% now. While it may sound logical, I doubt its practicality for the following reasons:

  • What would be the thresholds for an app’s marginal cost to be qualified for a lower commission? 5%, 10% or 30%? I suspect if this approach was implemented, we would see more apps claiming to have increased marginal costs
  • How would Apple validate the marginal cost? Surely, relying purely on an app’s words wouldn’t be the case. If an app has to submit financial records, who is to say those records are correct?
  • Plus, do you really want a $2 trillion company to have financial records of thousands of private entities? I don’t.

Right now, the practical and feasible things I think Apple can do include:

  • Be more consistent in its application of the App Store Guidelines
  • Be more transparent and communicative when it comes to high profile disputes to explain its side of the story
  • Think about how to change the App Store moving forward. I am sure they would prefer not having PR onslaughts. Hence, I truly hope that somewhere inside the company, some folks are trying to figure out a solution to this problem.

One grey area that is highly complex lies in the case of Spotify vs Apple Music. Spotify refuses to adopt in-app purchases because its low gross margin doesn’t allow it to. Apple Music, which competes with Spotify, may not be subject to the 30% requirement as Spotify. Some argue that Apple, as the owner of the App Store, shouldn’t launch competing products. However, as a company, Apple should be able to launch any product or service that is in accordance with the laws. I don’t see any legal problem with the existence of Apple Music. It is, to a high degree, similar to retailers launching private labels to compete with brands. I understand that a lot of critics are vocal about this behavior, but it has been around for a long time legally and until somebody makes it illegal to do so, I don’t see why Apple should be an exception.

Summary

It comes down to essentially this: when developers benefit from the App Store, they operate on the terms of Apple. Apple gains its enormous bargaining power by expertly managing both software and hardware. The $2 trillion+ valuation, customer satisfaction and half a trillion in app sales in 2019 are both proof that whatever the company is doing works and a condemnation of the lack of alternatives.

Of course, lawmakers can intervene and force Apple to change. I believe if that is the case, the company will appeal to even the highest court in the land and actually may have a chance to win. There are appeals from tech observers that the existing anti-trust regulations aren’t modern enough for the tech giants and should be updated. I believe it will be a time-consuming and complex process and I, for one, am glad that it’s not my job.

Disclaim: I own Apple stocks in my portfolio

Get to know Wix

What is Wix and what does it do?

Wix was founded in Israel in 2006 by Avishai Abrahami, Nadav Abrahami and Giora Kaplan. The trio were brainstorming ideas for a startup and they realized that building a website was complicated and expensive. They pivoted to building a tool that would enable an easy and painless process to quickly construct a website, even for those without coding experience. Hence, Wix was born. The company reached 1 million users in 2009, debuted on Nasdaq in 2013, reported 50 million users in 2014 and, as of June 2020, had 182 million registered users. The latest reports showed that Wix was available in 190 countries and 20 languages.

The company mostly operates on a freemium basis. In addition to a free tier, Wix also offers paid subscriptions such as Ascend by Wix and Premium, the latter of which comes into two sub-tiers: Website and Business & eCommerce. Moreover, there are also standalone services such as: Domains, Mailbox in a partnership with G-Suite, Wix Payments, Wix Answers and Wix Logo Maker.

Wix’s two main revenue segments are Creative Subscriptions and Business Solutions. The former consists of mostly Premium Subscription while the latter is made of Ascend by Wix, other services and the 30% commission that comes from the use of 3rd party apps. For instance, if a user pais $10/month to use a 3rd party app on Wix, Wix is entitled to $3/month and that revenue will go to Business Solutions segment. As of December 31, 2019, 84% of Wix’s premium subscriptions were yearly or multi-year subscriptions while the other 16% was made of monthly subscriptions.

Figure 1 – Wix’s services and reported segments

To cater to industries, Wix offers tailored packages that include various tools specific to each industry such as Wix Stores, Wix Hotels, Wix Bookings, Wix Music, Wix Video, Wix Restaurants and others.

How has Wix been doing?

Wix’s quarterly revenue has been steadily increasing. In Q2 2020 ending June 30, 2020, the company recorded around $236 million, up 27% from the same period a year ago. Over the years, there has been a shift in revenue mix as Business Solutions has been gaining share from Creative Subscriptions. Since Creative Subscriptions segment has a higher gross margin, the shift negatively impacts the company’s overall margin. In Q2 2020, the gross margin stood at 70%, compared to 75% a year ago.

Figure 2 – Wix’s quarterly revenue. Data source: Wix

Figure 3 – Revenue Mix. Data source: Wix

With regard to user acquisition, Wix has been steadily adding both registered and paid users; however, out of 100 registered users, there have been consistently only 3 paid users. What does work for Wix is its monetization from these paid users. According to the Investor Presentation, Wix, the company made more money and recouped marketing cost faster from more recent cohorts.

Figure 4 – Increasing Monetization of Cohorts. Data source: Wix
Figure 5 – Faster Recoup Time of Marketing Expenses. Data source: Wix

A concern for the company is operating margin. In Q2 2020, operating margin stood at -23%, the highest since Q1 2016. The increase in operating loss resulted from the decrease in gross margin and increase mostly in Sales & Marketing, which was 50% of total revenue in Q2 2020, the highest in the last 3 years. In my opinion, this is particularly worrying because the company lost more money from acquiring users during a pandemic that should accelerate the adoption of their offerings.

Figure 6 – Operating Margin. Data source: Wix

Unsurprisingly, North America is Wix’s biggest market with 57% of total revenue, followed by Europe, Asia and Latin America. Europe and Asia’s share has been consistent in the past 3 years while half of Latin America’s share in 2017 (9%) was transferred to North America. Since the company doesn’t break down margin by geography, it’s hard to say which one is more profitable, but I suspect that the fierce competition in the largest market contributed to the decrease in operating margin.

Summary

Wix is undeniably a success story. The company has been around for 14 years as 90% of startups fail. It is used by 180 million users around the world and many businesses are powered by its platform. However, I am very concerned about the company’s competitive advantages. Its competitors in the eCommerce space include Shopify, Square, WordPress, Adobe, BigCommerce, Etsy and to some extent Amazon, all formidable entities. A business doesn’t only need a tool to build a website. It needs other operational tools to run, and equally importantly traffic to its website to generate sales. That’s why you see Shopify partner with Facebook, Walmart and Pinterest. That’s why you see Shopify has shipped new features relentlessly and launched a fulfillment service of its own. That’s why it’s important that Amazon’s marketplace attracts 150 million unique visitors a month. I don’t see yet how Wix help small and medium sized businesses do that.

It can be argued that some of the standalone services are quite new and they take time to gain economies of scale. That is a valid argument. I hope it’s the case and that as they entice more customers to use such services, the marketing leverage will improve and so will the margin. As of now, that is not the case yet.

Get to know Snowflake

What is this company about?

Every business needs data to be competitive nowadays. The challenges related to data are daunting. First, data grows exponentially every day. Companies need to invest and maintain the right infrastructure to store a large amount of data. Second, the data infrastructure needs to support the business use cases. It must enable data staff to access data quickly and efficiently in order to build data-driven applications as well as carry out data analytics. As business leaders have to make quick decisions as a response to changing environments, it requires fast and accurate analytics.

For instance, I work at a bank and at the beginning of the pandemic, we needed to build monitoring dashboards quickly so that the management team could make quick decisions and have a finger on the pulse of the business. It was a challenge because our data warehouse’s structure made it so time-consuming to complete complex queries. And when multiple users tried to execute queries at the same time, the problem was exacerbated. I often had to work late at night to make sure my queries could finish faster. Our bank is just a regional one. I imagine that our data problems would be magnified if we had a bigger operation.

Snowflake is built to solve data problems. It offers cloud-based data storage and analytics services through which businesses can have a single truth of data, consistency, resiliency, flexibility and fast access to data. Snowflake products work on major public cloud providers such as AWS, Azure or GCP. On top of Snowflake, companies can build out a proper data warehouse, enable data analytics, power data applications and facilitate data exchange with other entities.

business2b11.jpg
Figure 1 – Overview of Snowflake. Source: Snowflake S-1
Figure 2 – Use Cases from Snowflake. Source: Snowflake

As a Software-as-a-Service, Snowflake allows customers to pay only for the resources and services they use. Since Snowflake relies on public cloud providers, their unit price mirrors that of such providers as in that prices change depending on which region you are located. Snowflake’s customer base is impressive. They count as clients corporations such as Akamai, Capital One, Neiman Marcus, AXA, McKesson, Hubspot. In terms of technology partners, Snowflake’s website lists 17 major partners, including GCP, AWS, Azure, Salesforce and Looker.

How has the company been doing?

In S-1, Snowflake revealed its financials all the way back to the quarter ending in October 2018. The company hasn’t been operationally profitable as it recorded losses in every quarter. Revenue increased from $29 million in October 2018 to $133 million in July 2020. Operating loss stood at $78 million in July 2020. Before Jan 2020, Snowflake’s operating loss was even bigger than its revenue every quarter, but since then the loss has gone down while revenue has accelerated.

While the company hasn’t been profitable, the good news is that its gross and operating margin have been improving. If the company can continue to keep its gross margin and increase operating leverage (spend less on acquiring customers & be more efficient), it’s slated to be profitable in the near future. The sign is already there. 94% of the company’s revenue in 6 months ending July 2020 was from existing customers that expanded their usage. That implied a customer stickiness, satisfaction with the products and cost savings in acquiring new customers to increase the top line.

The past 12 months were positive for Snowflake. The company doubled its customer base from 1,547 in July 2019 to 3,117 in July 2020, as well as the number of customers whose trailing 12-month product revenue was greater than $1 million increased from 22 to 56 in the same time frame. Remaining Performance Obligation (RPO), which is a performance metric that includes unrecognized revenue in the near future, grew from $221 million in July 2019 to $688 million a year later. Net revenue retention rate has been always higher than 150%, with the latest quarter seeing 158%. Snowflake expects this rate to decrease in the near future.

Regarding platform usage and customer acquisition, Snowflake has been fairly impressive. Its platforms are used by 7 of the top Fortune 10 (4% of revenue in July 2020) and 146 of the top Fortune 500 (26% of total revenue). In the month of July 2020, the company reported an average of 507 million daily queries, compared to 254 million daily queries in July 2019. Net Promoter Score (NPS), a metric that indicates how willing a customer is to promote a brand, stands at a very good 71.

Capital One is an important client for Snowflake. The bank made up 17% ($16 mil) and 11% ($29 mil) of Snowflake’s annual revenue in fiscal year ending Jan 2019 and Jan 2020, respectively. While its share of revenue was less than 10% in the quarter ending July 2020, it still made up 22% of Snowflake’s account receivables ($33 mil). The trend lowers risks for Snowflake and investors as the company is now less reliant on this one particular customer.

What are the tailwinds behind Snowflake?

In its S-1, Snowflake reported a Total Addressable Market of $137 billion for the company as of 2020. Given the annual run rate of just $520 million in revenue, Snowflake has a lot of room to grow in the future. Furthermore, 12% of the company’s revenue came from customers outside the US. That indicates a big opportunity internationally for Snowflake. Since the company is built on top of public cloud providers whose infrastructure spans the globe, it already has the base infrastructure to expand internationally.

More importantly, the digital transformation that is underway in the corporation world is positive for Snowflake. As companies become more agile and digital, they need data to make informed decisions and be competitive. Hence, products and solutions that live in the cloud like Snowflake’s are well-positioned to capture this trend. From a personal perspective, my company is still hosting data on legacy infrastructures which present a bottleneck to our data analytics and operations. I can’t tell you how many times I had hours off as our data warehouse went offline. I can’t count how many hours I wasted because it took too long for complex queries to run. My developer colleagues reported happiness with the upcoming transition to Snowflake. Hence, this gives me a bit of confidence in the company as I know that my employer isn’t the only one running on legacy data infrastructure.

Risks

Among the risk factors listed in its S-1, there is one that I think stands out for Snowflake: its reliance on public clouds. Here is what it wrote:

We currently only offer our platform on the public clouds provided by AWS, Azure, and GCP, which are also some of our primary competitors. Currently, a substantial majority of our business is run on the AWS public cloud. There is risk that one or more of these public cloud providers could use their respective control of their public clouds to embed innovations or privileged interoperating capabilities in competing products, bundle competing products, provide us unfavorable pricing, leverage its public cloud customer relationships to exclude us from opportunities, and treat us and our customers differently with respect to terms and conditions or regulatory requirements than it would treat its similarly situated customers. Further, they have the resources to acquire or partner with existing and emerging providers of competing technology and thereby accelerate adoption of those competing technologies. All of the foregoing could make it difficult or impossible for us to provide products and services that compete favorably with those of the public cloud providers.

Source: Snowflake’s S-1

This is really a genuine concern. I don’t see Snowflake will build out its own underlying infrastructure in the near future. Mirroring the scale and sophistication of these public providers, especially if they want to expand overseas, will be expensive and resource-consuming. While such a reliance presents a risk, particularly when all AWS, Azure and GCP have competing products with Snowflake, the company also brings a lot of revenue to these cloud providers. So it creates an interesting dynamic in which I also suspect the Big Three will do anything to harm its startup customer.

In summary, my personal experience gears me towards investing in this company. I also observed some folks lauding the business on Twitter. The company itself has seen impressive growth and has a lot of room to grow as well as tailwinds. I personally look forward to the IPO debut of Snowflake.

Likely competition for Uber/Lyft in California. Grocery delivery is growing. Apple’s response to Epic’s lawsuit

Potential competition for Uber/Lyft in California

The two poster children of ride hailing companies in the US, Uber and Lyft, are having a legal fight with the state of California. The outcome of that battle remains to be seen, but if they lose, the companies already threatened to leave the state. Meanwhile, CNBC reported that at least 2-3 ride hailing startups talked about potentially swooping in to replace Uber and Lyft if they depart. One of those startups that I found interesting is Alto. Alto is a ride hailing startup that mainly operates in Dallas and Fort Worth. What differentiates Alto from their two bigger peers is that Alto’s drivers are salaried employees with benefits. Also, drivers don’t have to worry about gas or maintenance costs. Here is what their recruitment page says

Source: Alto

Some critics of AB5, the law that can potentially cause Uber/Lyft to leave California, say that the law is flawed in that it kills the flexible schedule that drivers, classified as contractors, enjoy. That is a valid point. Some do prioritize a flexible schedule over everything else. I have seen myself several drivers who just drive on the weekends to get some more money on this side gig. These drivers likely wouldn’t appreciate entering an employment contract that would likely require them to work more than they want. Clearly, in this case, AB5 likely won’t work.

That; however, doesn’t change the fact that Uber and Lyft’s refusal to classify drivers as employees can put drivers as disadvantage. Some drivers put in a lot of working hours, but do not earn enough after they take into account gas, car maintenance expenses and dead miles (hours when they drive around without any rides). Because they are not employees, they don’t have benefits like paid time off or insurance either.

There are two separate camps in this argument with virtually conflicting interests. Whether AB5 alone is a sufficient fix remains to be seen, but the existence of companies like Alto and its willingness to enter California’s market offer proof that there is an alternative model to what Uber and Lyft stand for.

Online grocery continues to grow amid the pandemic

Since March, Covid-19 has pushed online grocery to new heights that few could have predicted. According to Brickmeetsclick, even though growth has plateaued in June, online grocery sales reached $7.2 billion and an incredible 85 million orders.

Recent market developments suggest that the trend is likely to continue in the upcoming months. Shipt announced the drop of membership requirements and instead let customers pay $10 for a single order, $9 per delivery for 3 orders and $8 for 5 orders. Additionally, Walmart and Instacart recently partnered to provide same-day delivery in four markets across California and Oklahoma. Last Thursday, DoorDash entered the grocery delivery market with DashPass, a $10/month subscription which allows customers to order and receive groceries in about an hour. Last month, Uber joined the party with their own grocery delivery option through the main Uber and Uber Eats apps. Moreover, FreshDirect unveiled its expansion into New Jersey, New York and Connecticut.

Grocers and delivery services are working in tandem to facilitate more online grocery spend. Grocers let customers receive orders at their front door, pick up and drive up at stores. Delivery services lower barriers and compete with one another to acquire users. In the near future, this battle will be very fierce and the biggest beneficiary will be the end consumers.

Apple’s legal issues with Epic Games

Apple responded to Epic Games’ lawsuit over the App Store policies. In the response, Apple offered reasons why the court should let Apple continue to ban Epic Games’ apps while the legal battle rumbles on, including:

  • Epic’s alleged harm is not irreparable. Epic’s apps will be reinstated on the App Store if the game maker removes its own payment option, the cause of its violation of the terms of services, and adheres to the guidelines that Epic agreed to from day one.
  • Epic’s alleged harm is its own doing. The game maker first asked Apple for a special treatment by creating an Epic Store inside the App Store. Then, it asked Apple to open up the App Store by allowing more payment options. After the requests were declined, Epic Games decided to circumvent the App Store policies by offering its own payment scheme, suing Apple and launching a coordinated PR attack.
  • Apple does not engage in anti-competition practices and the App Store policies are to make sure that 1/ consumers’ privacy and safety are protected and 2/ Apple gets paid for its investments

The legal document is here and if you’re interested in this kind of stuff, you should have a read.

Personally, I don’t think Epic will win this legal battle. The App Store is Apple’s investment and intellectual property. Hence, Apple is entitled to enforcing the policies on the app marketplace, the same policies that Epic Games has agreed to when it launched its apps on the App Store. Whether Apple is wielding too much power is another matter for discussion, but if you created a marketplace and invests a lot of resources into it, it’s pretty difficult to understand the sentiment that you’re not allowed to benefit from your own investments or to enact and enforce policies that you see fit.

Plus, what happened, based on the emails exchanged between Apple and Epic, seems pretty distasteful and bully-like from the latter. On 6/30/2020, Tim Sweeney wrote to Apple the following, which is part of a longer email. His requests were rejected by Apple on 7/10/2020:

Source: Scribd

On 8/13/2020, Epic wrote to Apple, declaring its intention not to follow the App Store guidelines and to take legal actions if Apple retaliated. Apple subsequently wrote to Epic twice, informing the app maker of its violations and asking it to remedy the situation. Epic Games instead sued Apple for enforcing rules on…Apple’s own app marketplace.

Source: Scribd

Since I am not a lawyer, I’ll leave the argument on legal standings to the court and the lawyers from both sides, but from a common sense perspective, I don’t see a chance for Epic here. Hey app from Basecamp had trouble with Apple before. Instead of raising a legal fuzz, Basecamp raised the issue publicly on Twitter and engaged in discussions with Apple to resolve conflicts, which it did. And Hey didn’t even demand to have its way in the App Store like Epic Games did. That’s the way to do it, not the course of actions and manner that Epic Games pursued here.

This legal battle will leave Epic’s reputation tainted while also not doing Apple’s any favor.